China Focus: Multinationals eye China market as consumption pattern shifts

On its launch day in China, Apple Pay saw over 30 million Chinese bank cards linked to the payment service, an achievement that impressed Apple Pay vice president Jennifer Bailey.

"We think China could be our largest Apple Pay market," Bailey told media last Thursday.

To lure more customers, some of Apple Pay's partner banks worked with Starbucks to offer discounts to customers who pay with Apple Pay.

With wages up and people accumulating wealth, the rising middle class is driving a major shift in China's consumption pattern, making the country a huge market that multinationals can ill afford to ignore.

Increasingly, Chinese are able to afford more than just the bare necessities. Instead, they spend on things they like but don't need, those "discretionary items."

According to data from consulting firm McKinsey & Co., discretionary spending is forecast to grow over 7 percent annually between 2010 to 2020, while seminecessities, including health care and apparel, will expand around 6 to 7 percent, all surpassing the growth rate of actual necessities.

The shift is already seen in satisfying results reported by companies selling high-end products, such as Apple.

While an iPhone costs almost five times the average price of a domestic smart phone, Apple has a substantial consumer base in China that not only pays for the phone itself but for the brand.

"There's an enormous number of people moving into the middle class and I think this provides us with great opportunities to win over some of these customers into the Apple ecosystem," said Tim Cook, Apple's chief executive during an earnings call.

"We remain very bullish on China, and don't subscribe to the doom and gloom kind of predictions frankly." Cook said.

The Chinese middle class for the first time outnumbered those in the United States in 2015, hitting 109 million at the American standard after purchasing power is adjusted, according to a report by Credit Suiss.

And the number continues to climb. In 2015, China's national per capita disposable income rose 7.4 percent from 2014 in real terms, outpacing GDP growth.

Seeing the opportunities of an increasingly well-off society, foreign firms are tapping into China's entertainment industry to monetize on the growing interest in the high-end recreational market.

American film studio 20th Century Fox, for example, told China Daily recently that it had chosen Beijing to be the destination of the world's first ever Simpsons store.

To be opened in March, the store will offer merchandises related to the American animated sitcom, which has proven to be very popular in China.

The decision followed a similar move by Walt Disney Co., which opened the world's largest Disney store in Shanghai in May 2015 to huge queues of customers.

The domestic entertainment industry is also taking off thanks to this shift. During the Spring Festival holiday, box office sales surged 67 percent year on year to 3 billion yuan.

Spending on recreational activities including travel, dining, sports, and gaming in China still lags behind the developed world, and "fun" has the biggest potential for growth, said a Goldman Sachs report on consumer research.

"There's a perception that China's consumption story has already played out," said Joshua Lu, co-business unit leader of asia consumer research at Goldman Sachs. "In the coming decade, in a way the story is even more exciting as hundreds of millions will see their income doubling and enter the middle class. That migration will continue to be a powerful driver of the China consumption growth story."

In 2015, consumption contributed 66.4 percent to China's gross domestic product, up 15.4 percentage points from 2014.

As China transitions into a more consumption-driven economy, global companies should make smarter, higher-quality products to adapt, too. After all, consumers are what really matter for most of them. Endi